A home equity line of credit (HELOC) allows you to tap into the equity in your home, giving you convenient access to cash when you need it. Equity is the difference between what you owe on your home and its value.
A standby home equity line of credit can provide cash in an emergency. Unlike a home loan, you only pay interest on the part of the credit line you use. You owe nothing to a HELOC until you withdraw the funds.
He mustCan you get a HELOC even if you don't need the money right now? Weighing the pros and cons can help you decide.
In this guide:
- What are the advantages of a HELOC for all cases?
- What are the disadvantages of a HELOC just in case?
- If I get a HELOC out of caution, what can I do with the money?
- How long can I leave a HELOC open without using it?
- What if I get a HELOC just in case, but don't use it?
- How long do I have to stay home to qualify for a HELOC?
- How to get a HELOC
What are the advantages of a HELOC for all cases?
origins HELOC40.6% yearthrough the second quarter of 2022, according to TransUnion data. And while it's unclear how many homeowners took out HELOCs for emergency purposes, we can surmise that some borrowers used their lines of credit for unexpected expenses.
A HELOC can come in handy in an emergency as it is a revolving line of credit that you can borrow when needed. After a typical down payment period of five to 10 years, in many cases you repay the loan with interest over 20 years. And if you never have to touch your line of credit, you'll never pay interest.
Once you apply for a HELOC, approval can take anywhere from a few weeks to a few months. If you need cash right away, you may not have time to wait for your lender to approve a loan or line of credit. So preparing ahead of time for a home equity line of credit can help.
Other benefits of buying a HELOC just in case include the following:
- convenient access🇧🇷 Depending on your lender, you may be able to withdraw your line of credit with a debit card, paper checks, or wire transfers to a connected bank account.
- Higher credit limits🇧🇷 Depending on the amount of equity you have in your home, you may be able to get more loans with a HELOC than with a credit card or personal loan.
- Interest rates. While many HELOC rates are variable, they are generally lower than the double-digit Annual Percentage Rates (APR) on credit cards.
- fixed price option. Certain lenders offer a flat fee option for a HELOC that allows for payment predictability.
- flexibility. While you can open a HELOC for emergencies, you can also use it for other purposes.
What are the disadvantages of a HELOC just in case?
A home equity line of credit works similar to a credit card. Both are revolving lines of credit.
However, a HELOC differs in two main ways:
- You may have to pay initial or annual fees, including closing costs and maintenance fees.
- While credit cards are not secure, a HELOC protects your home.
Typical HELOC closing costs are2% to 5% of your credit limit, regardless of the amount of credit limit you use. You pay the cost up front, and your lender may charge you an annual maintenance fee to keep your line of credit open when you're not using it.
But the biggest drawback is the risk of foreclosure. If you use part of your HELOC to cover an emergency and don't pay the refund, you could lose your home to foreclosure.
Are there any other downsides to getting a HELOC just in case?
In some cases, the challenges include:
- exchange rate fluctuations. As your HELOC floating rate increases, any outstanding balance will earn higher interest. While some lenders offer a fixed rate HELOC, they may be subject to an initial 12-month variable rate.
- Minimum draw requirements. Lenders may require a minimum withdrawal once you open your line of credit. For example, you may need to withdraw $10,000 immediately, regardless of whether you have an emergency. Then you have to pay it back with interest.
- Overspending potential🇧🇷 You can get a HELOC, but you risk being tempted to dive into it and incur unnecessary debt.
- suspension or reduction. Lenders can verify your HELOC andReduce or suspend your line of creditif you notice a significant change in the value, creditworthiness or solvency of your home.
If you intend to use your HELOC for emergencies only, it is important to read the fine print so there is no room for surprises in an emergency.
If I get a HELOC out of caution, what can I do with the money?
HELOCs are flexible. You can spend the money on whatever you need. Remember: Debt can put your home at risk of foreclosure if you can't pay your line of credit.
Does this mean you should avoid HELOCs for non-emergency situations? Not necessarily if you are using the money to fund a specific goal or result that could generate financial benefits.
For example, the IRS allows yousubtract HELOC and home loan interestif you use the proceeds to "build, purchase, or substantially improve" the property on which the loan is secured. Similarly, using a HELOC for debt consolidation can save you money if you can afford it at a lower interest rate.
If you're considering completing a HELOC just in case, it's important to define an "emergency expense." You can avoid using your line of credit unnecessarily. Common scenarios where you may come into contact with a HELOC include:
| Emergency applications for a HELOC | Non-emergency uses for a HELOC |
| Unexpected medical bills due to illness, injury, or temporary disability. The daily cost of living if you lose your job or are laid off for a long period of time. Emergency home repairs not covered by your home insurance. Unexpected vet bills when a pet is sick or injured. Family emergencies where you need to travel or be away from work. Unforeseen vehicle repairs when your car breaks down or you don't have accident insurance coverage. | Optional medical interventions that are not covered by health insurance. Major expenses, such as B. a wedding, a vacation, or a new vehicle. Home renovations or improvements intended to increase the value of the home. Consolidation of high-yield credit cards or other debt. Pay education costs for yourself, your spouse, or your child. Start a new business adventure. Buying a second home or vacation home. |
How long can I leave a HELOC open without using it?
As mentioned above, HELOCs have an initial design period that can last anywhere from five to ten years. You can tap into your line of credit and often only make interest payments during that time. Your lender may also offer you the option of making primary payments.
What happens if you don't use your line of credit during the withdrawal period?
Your lender may charge a fee.idle ratealong with an annual membership fee. If you close your HELOC early, you may also incur a cancellation fee. But can a lender close your HELOC if you're not using it?
usually,Lenders cannot close on a HELOCwithout reasonable justification, which may include:
- Significant decrease in the equity value of your home.
- Fraud or misrepresentation (for example, providing false income information).
- Act or omission that compromises the security of the creditor in the house.
- Changes in your financial situation that may prevent you from repaying the borrowed money.
This list does not include simple inactivity, so opening a HELOC as a precaution would not result in the subsequent closure of your line of credit. However, you can still pay an inactivity fee.
What if I get a HELOC just in case, but don't use it?
Once the draw period for a HELOC ends, your line of credit will be canceled and you will enter the payback period. You must make principal and interest payments on your balance when you have withdrawn a portion of your line of credit.
If you had a zero balance, you would not have to pay anything back. Your line of credit would be cancelled. If you paid an annual fee during the draw period, this would not apply.
If you're considering a HELOC, it's a good idea to ask about fees before you apply. Standard rates include the following:
- origination fees
- Monthly or annual maintenance fees
- final costs
- prepayment penalties
- idle fees
- account closing fees
Understanding the fees can help you get a better idea of what a HELOC might cost, even if you never need to use one.
How long do I have to stay home to qualify for a HELOC?
There is no specific waiting time required to obtain a HELOC. Sometimes you can apply for a real estate loanwithin a month or two of completionon a property.
What is most important to lenders is how much equity you have in the house. Typically, lenders expect you to keep 15-20% equity in your home based on the loan amount (LTV).
LTV is your mortgage debt divided by the appraised value of a home.
The formula to calculate your LTV is as follows:
Current Mortgage Balance / Current Appraised Value = LTV
Here's a more detailed example: If you owe $200,000 on your mortgage and your house is worth $300,000, your current LTV is 67%.
Imagine applying for a HELOC and your lender sets an LTV limit of 80%. Your new HELOC, along with your mortgage, cannot exceed 80% of the value of your home.
Now you need to determine your new LTV if you add debt to your home by taking out a HELOC.
If you complete a $40,000 HELOC, you will have a total of $240,000 in home loans. And if you divide the new loan amount of $240,000 by the appraised value of $300,000, you get an LTV of 80%.
How to get a HELOC
Should I get a HELOC just in case?The answer depends on your situation and needs.
If you decide to proceed with a HELOC, the next steps are:
- Calculate your LTVto determine if you may be eligible for a HELOC.
- Consider how much of your capital you want to access.
- Compare HELOC rates from different lenders, including fixed and variable rate options.
- Consider pre-approval if you can get price quotes without hurting your credit score.
Once you've decided on a lender, you can apply, submit supporting documents, and wait for approval.
If you are considering a home equity line of credit, check out ourGuide to Best HELOC Rates and Lenders🇧🇷 For more guidance on how to unlock your capital, check out our article titled "Is a home equity loan a good idea?„